buyback of shares
DESCRIPTION
Buy-back of shares / securities of the company, through different modes and other related compliance are in detail.TRANSCRIPT
BUY BACK OF SHARES
Meaning:
Buyback of shares is processes where a company seeks to repurchase its own securities from its existing shareholders.
Buy back of equity shares is an important mode of capital restructuring.
PROVISIONS OF BUY BACK
Under Section 68 of Company’s Act, 2013, read with Section 77A of Companies Act, 1956, any company limited by shares or company limited by guarantee and having a share capital can buy its own securities, whether it is a private company, public company or unlisted Company.
BUY BACK OF SHARES
OBJECTIVES OF BUY BACK
Improves EPS, Return on Capital, Return On Networth
Enhance longterm Shareholder value
Additional exit route
To prevent or inhibit unwelcome takeover bids
To achieve optimum capital structure
BOARD RESOLUTION
Not exceeding 10% of the total paid-up equity capital and free reserves of the Company.
Resolution should be passed at Meeting of Board of Directors as per Section 292(1)(aa) of Companies Act 1956.
SHARE HOLDERS’RESOLUTION
Special Resolution -Listed Companies by
Postal Ballot -Unlisted Companies by
General Meeting
Not exceeding 25% of the total paid-up capital and free reserves of the Company
Buy back of equity shares in any financial year should not exceed 25% of the total paid-up equity capital of the company [ Proviso to Section 77A(2)(c)].
For example:
The capital structure of a company consists of: 10,00,000 equity shares of Rs.10 each fully paid up 10,00,000 equity shares of Rs.10 each on which Rs.5 is paid up Free Reserves Rs. 7,50,00,000
The total paid up equity share capital of the company is Rs.1,50,00,000 [1,00,00,000 + 50,00,000]Board can buy back upto 10% of total paid up equity share capital and free reserves and that is Rs.9,00,000 [ 10%(1,50,00,000+7,50,00,000)]Shareholders can approve buy back upto 25% of paid up capital and free reserves that is Rs.2,25,00,000 [ 25%(1,50,00,000 + 7,50,00,000)]Buy back should not exceed 25% of paid up equity capital that is Rs.37,50,000 [ 25%( 1,00,00,000 + 50,00,000)]
CONDITIONS TO BE FULFILLED AND OBLIGATIONS FOR BUY BACK OF SECURITIES
Fully Paid up securities.
Debt equity ratio of the company should not exceed 2:1 post buy back.
Transfer to Capital Redemption Reserve where buyback is made out of free reserves.
Further issue of same kind of securities should not be made within 6months from date of completion of buy back.
Buy back should not be made if it results in reduce in the non-promoter holding below the public shareholding.
Promoters or PAC should not deal in the securities of company while buy back is open.
Disputed securities kept in abeyance.
However, BUY-BACK of any kind of shares or same other specified securities CANNOT be made out of an earlier issue of the same kind of shares or same kind of other specified securities - Sec.77A(1).A company cannot use proceeds of issue of equity shares to buy back equity shares. But company can use proceed of issue of debenture/ Pref. Sh. To buy its equity shares.
1. Free Reserves 1. Free Reserves
3. Proceeds of any shares or other specified securities.3. Proceeds of any shares or other specified securities.
2. Securities Premium Account 2. Securities Premium Account
BUY BACK PROCEDURE FOR LISTED SECURITIES
As per provisions of Section 77A, 77AA, 77B of the Companies Act, 1956 and the SEBI( Buy-back of Securities) Regulations, 1998.
Amendment of Articles by passing special resolution and file Form-23 with Registrar of Companies.
Special Resolution shall have explanatory statement stating the necessity, class of securities, amount to be invested and other disclosures of buyback , method of buyback, basis of arriving at price, sources of funds, etc and Approval of shareholders to be obtained.
Disclosure of resolutions and other necessary documents should be submitted to SEBI and the Stock Exchanges as and when it is required.
Company should nominate a Compliance Officer for ensuring all the necessary compliances relating to Buy-back.
Merchant Banker should be appointed who is registered with SEBI.
Investor Service Centre should exist.
Time limit for completion of Buy-back should be within 12 months from date of passing of the special resolution or the resolution of the Board of Directors.
METHODS OF BUY-BACK
Book- Building Process
Stock Exchange
Buy-back from Open Market
Book Building Process:Special ResolutionAppoint Merchant BankerPublic AnnouncementEscrow AccountElectronically Linked Transparent facilityBidding CentersPeriod of buy back- Not less than 15 days and not exceeding 30 daysMerchant Banker to determine priceExtinguishment of securitiesRegister of bought back securitiesStock Exchange:Special ResolutionSecurities should not be from Promoters and persons in control of the companyMerchant Banker should be appointed and Public Announcement should be madeStock exchange having Nationwide Trading TerminalCompany and Merchant Banker should give information to Stock Exchange on daily basis regarding securities bought-back and same should be published in a national dailyIdentity of the company as a purchaser would appear on electronic screen when the order is placed.Extinguishment of securitiesRegister of bought back securities
IMPORTANT ASPECTS OF BUY BACK FOR LISTED COMPANIES
Declaration of solvency
Filing of Return of Bought back Securities with Registrar
Locked-in shares not to be bought-back
Publication of post-buy back advertisement
Communication with Authorities ROC SEBI Stock Exchange
Income tax Aspects
Stamp Duty on Buy-back
BUY BACK PROCEDURE FOR PRIVATE LIMITED & UNLISTED PUBLIC LIMITED COMPANIES
The procedure for buy-back of securities by private limited and unlisted public limited companies is laid down in Sections 77A, 77AA and 77B of the Companies Act, 1956 and the Private Limited Company and Unlisted Public Limited Company ( Buy-back of Securities) Rules, 1999.
Procedure for Buy-back:
Approval of Board of Directors by passing necessary resolutions.Buy-back can be made by purchasing securities from existing shareholders on a proportionate basis or by purchasing the securities issued to employees.Special Resolution should be passed in General Meeting of the company. Special Resolution should be along with explanatory statement stating necessity of buy back, class of security, method of buy back, and all other disclosures relating to buy back.File Letter of Offer , Declaration of Solvency in Form 4A with Registrar of Companies.Letter of offer to be despatched to shareholders not later than 21 days.Payment to shareholders.General Obligations of company.Return to be filed with ROCExtinguishment of Certificates.Register of Shares.
RESTRICTIONS ON BUY-BACK OF SECURITIES – Section 77B
Company should not buy-back its securities if -Default subsists in repayment of deposits, interest payable thereon, redemption of debentures or preference shares, etc.
-Defaulted in relation to preparation and filing of its Annual Return.
-Default in relation to payment of Dividend to any equity or preference shareholders.
-Default in preparation of the Annual Accounts.
Buy-back should not be made by a company -Through any subsidiary company including its own subsidiary -Through any investment company or group of investment companies
CONCLUSION
Buy Back of shares has its pros and cons
On one hand it prevents takeovers and mergers thus preventing monopolization and aiding the survival of consumer sovereignty.
On the other hand Buy back can help in manipulating the records in flatting share prices PE Ratio, EPS, thus misleading shareholders.
Thus, knowledge of the impacts of Buy-back becomes vital and every shareholder must reconsider all his views before purchasing the shares of companies involved in the process of Buy-back.
